In our last post in this series, we discussed the importance of having guiding principles for a supply chain. Now, we'll explore the second question:

What wastes lay hidden in areas such as: inventory, transportation, space and facilities, time, packaging, administration and knowledge within my supply chain?

First, let’s start by getting a clear definition of what "waste" means to us relative to a supply chain. It is very difficult for us to visualize the waste in our supply chain because it has been suggested that up to 80% of the work in logistics and supply chains takes place outside of our immediate viewpoint.

In most cases, we don’t even know if we have something until it arrives at our plant or facility. We might know that something has been delivered, but we probably don't know if the order is on time and in full (OTIF) until somebody verifies it at the receiving dock. This means that the material could have been damaged in transit, or short shipped with other pieces to come later. All of this means that there will be be a significant waste of time and resources required to fix the situation when we do finally receive all of it.

Resolving this visibility issue will help us to better define what is and what is not working in our supply chain. It is also helpful to understand the two basic components of our supply chain: Waste or Value.

Waste is defined as anything that does not add value to the customer. Further, Value is that which the customer seeks and is willing to pay for.

It is that simple; we should work on increasing the amount of value in our supply chain while reducing the waste. In turn, the customer will see an ever-increasing amount of value in the products/services that they are purchasing from your enterprise.

When looking at costs, we should remember the following statement:

“Costs exists to be reduced, not to be calculated." -Taiichi Ohno – Co-founder of the Toyota Production System

Now back to our question: What wastes lay hidden in areas such as: inventory, transportation, space and facilities, time, packaging, administration and knowledge within my supply chain?

Let's start with waste of inventory.

Waste of Inventory

Inventory is one of the most visible forms of waste that is often located (and stockpiled) in warehouses and distribution centers. Different forms of inventory exist, all with associated costs and wastes such as in-transit inventory, raw materials inventory, work-in-process inventory and finished goods inventory.

With respect to Work-In-Process (WIP) inventory, “We should not make what will not sell.” This is the same for all processes, as we can’t sell “work in process” inventory.

A short while ago, I was at a company whose team showed me some WIP. It was a large amount with expensive components. It was just waiting for a purchase order and then it would be packaged and sent.

The product sat there for over two years. During that time, the company ownership had transferred to another company name. During this transition, the company took all of that inventory and relabeled it with the new brand name at a substantial cost.

Several years after that, it was still taking up valuable space and warehouse costs, ready to be assembled into the final product with new labeling. The costs associated with this activity were being factored into the cost of goods sold for other, successful products. This inventory was truly a waste with serious implications, as it continued to add costs to the company while continuing to consume expensive warehouse space.

It's important to consider all of the additional costs associated with sitting inventory: the capital cost to acquire it, insurance, taxes, obsolescence, damage, pilferage, storage and material handling. All of these costs go into the waste of carrying inventory – which in some companies can be in a range from 5% to 30% of the total acquisition cost.

It's especially important to watch out for high inventory levels on high dollar-value inventory, high cube inventory, and excess and obsolete inventory. They will impact your overall costs significantly - from either a dollar value for the item, or from a space consumption cost for storage in a warehouse - along with all related inventory carrying costs.

One of the biggest wastes in inventory is that of excess and obsolete inventory. This inventory continues to use up space and its value continues to decline. It's important to purge that which we do not need.

We must always be vigilant in questioning our inventory levels to ensure that what we have is actually needed.

In the coming weeks, our "Supply Chain Recovery" blog series will continue to explore:

Background: How and why did we get into our current supply chain situation?

Current Condition: What are the problems we need to solve?

Goals and Targets: Where do we need to go, and how will we get there?

Analysis of Obstacles: What is in our way and how do we correct it?

Proposed Countermeasures: How do we remove obstacles to solve our problems? What is the benefit of each countermeasure and who do we need to implement them?

Plan: How we will implement each countermeasure? How will we know we are successful?

Follow Up: What we will do in the future to ensure that we stay on track? How we will adjust to new conditions?